1. Commodity Trading School Premium Collection
Short Option Trading

2. Paul Brittain Commodity Trading School & RCM Alternatives are both registered DBA’s of Reliance Capital Markets II LLC

3. Paul Brittain-Creator of Commodity Trading School.
30 year industry veteran.
Branch Manager RCM Asset Management
Regular Contributor to Various Industry Publications.
Profiled in Trader Monthly (June 2005).
Author of the book Commodity Options
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls

4. There is a substantial risk of loss in trading futures and options and is not suitable for all investors, you should carefully consider whether trading is suitable for you in light of your circumstances, knowledge and financial circumstances. You may lose all or even more than your original investment. Past performance is not indicative of future results. Note: Selling Options subjects the trader to margin calls and virtually unlimited risk
Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.

5. Option Writing
Option writing is the act of selling an option and collecting the premium, or price of that option. As with buying options, this can be done to take advantage of either an upward or downward trend in a particular market.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls

6. Why Selling Options Can Make Sense
The logic behind option selling is similar to that used by insurance companies. Insurers sell policies in order to collect premium knowing that some claims will be made against them. However, they also believe that in the long run they will have collected more than they pay out. Statistics show more options expiring worthless than not.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls

7. Many option sellers look for opportunities such as this to take advantage of shorting options with 45 days or less until expiration that are in the direction of the trend.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls

8. More options expire worthless than not
More options expire worthless than not. When you sell options, time is on your side. However traders are exposed to unlimited risk as well as margin calls in exchange for limited profit potential.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls

9. Why, then, are there so many option buyers?

10. Many traders are lured by the idea of unlimited profit potential and limited loss. Option buying is popular because it seems affordable yet is potentially lucrative.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls “limited loss” includes the premium paid on the option, plus commissions and fees

11. However, because it is true that most options expire worthless, and the option buyer cannot lose more than the original investment premium paid for the option plus commission and fees, it is likely that he/she will lose some or all of it.

12. For that same reason, selling options can be a very attractive way to take advantage of a markets’ movements.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls

13. However option selling, carries unlimited risk and subjects the seller to margin calls and therefore doesn’t have the same appeal. The idea of limited profits and unlimited loss seems undesirable to many traders.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls

14. Volatility Liquidity Technical Indicators
There are three areas to look at when determining if a markets’ condition is suitable for option writing and how to determine your entry points:
Volatility
Liquidity
Technical Indicators

15. Reverse Break Even
A critical aspect of option selling is the calculation of break even on a short option.

16. RBE Calculation
Break even of a short option is equal to the strike price plus or minus the premium collected after deducting commissions and fees
BE Short Put = Strike – Premium Collected
BE Short Call = Strike + Premium Collected

17. Option Selling Strategies

18. Strangle Writing
Perhaps one of the most effective short option strategies is strangle writing. In its simplest form strangle writing is the simultaneous sale of a call and a put with equal distance to the market and the same expiration date.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls

19. The premise of the trade is to profit on the short calls if the futures market falls and profit on the short puts if futures prices increase.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls

20. In other words, protection is provided by the design of the strangle
In other words, protection is provided by the design of the strangle. Conservative traders tend to write spreads with wide profit zones, and aggressive traders tend to write narrow strangles.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls

21. If a market is trading sideways, a strangle should consist of evenly weighted options. In other words the delta values of the short calls should be similar to that of the short puts.

22. If the futures price is between strike prices at expiration the option seller keeps the entire premium collected.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls

23. The RBE even of a short strangle equals the strike price plus or minus the total premium collected (see the following example).
BE Downside = Put Strike - Total Premium
BE Upside = Call Strike + Total Premium

24. Example

25. May 8th : Sell June S&P 2460 call/2290 put strangle for 10.05
See RBE and profit zone calculation on next slide
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls

26. Reverse Break Even Calculation
Even though there are two legs on a short option strangle, the margin requirement is the equivalent of one futures contract or less depending on the SPAN (standard portfolio analysis of risk calculation) at the exchange level, of course the FCM has the right to increase these requirements if they choose.
RBE (reverse break even) Calculation is calculated by adding together the TOTAL premium collected, in this instance = From there you deduct for commission and fees. Let’s say you pay $20.00 total (all in). Here’s the math 20 X 2=40
40 divided by $5 (the underlying multiplier) = 8 tics – 8 = With the call with a strike price of =2470 is your RBE on the upside. With the put with a strike price of (premium)= So the profit zone on the spread is from2470 down to 2280, on expiration if the market is within this range the trade would show a profit, with the maximum profit if the market is in between the short call and short put. Outside the RBE, above 2470 or below 2280 the trade has UNLIMITED risk.

27. Looking at the June Emini we identify its recent trading range, marking support and resistance, as we enter into the last 45 days before option’s expiration. A suggestion would be selling the June 2460 call as well as the 2290 put
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls

28. Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls

29. Selling Outright Options
Strangles are not always appropriate. Believe it or not, if volatility is high countertrend option selling may be a viable strategy. If a market is in either a strong uptrend or downtrend you probably should avoid selling options in front of the trend, although on the other hand, selling in the opposite direction can be dangerous as well trends do tend to end

30. If this is the case, a trader should determine levels of support and resistance and attempt to collect premium on options with strike prices beyond technical levels.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls

31. Example

32. Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls

33. June 8th: Sell 1 August Bean $12.60 call for 26 ¾ cents.
See RBE and profit zone calculation on next slide

37. In conclusion…
Premium collection in my opinion, is fast becoming a trend among futures traders. Although short option trading leaves traders open to unlimited losses, when used in conjunction with risk management techniques it can be a very advantageous strategy.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Selling Options subjects the seller to virtually unlimited risk and margin calls

38. In Review… Why Selling Options can Make Sense Volatility Liquidity
Technicals
Making Adjustments
Option Selling Strategies

39. Paul Brittain
RCM Alternatives Is a registered DBA of Reliance Capital Markets II LLC